On the Markets: Second Quarter 2019

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Economic & Market Outlooks

Each quarter our asset managers provide outlooks covering the bond, equity and real estate markets along with views on asset allocation. Read their perspectives on the latest economic and market trends.

Whitepapers & Commentary

A Trifecta for EM Equity Outperformance?

Having been cautious on emerging market equities for most of 2018, QMA’s Global Multi-Asset Solutions Team has recently shifted to a more positive stance, tactically adding to their emerging markets (EM) equity allocation. QMA believes that the global macroeconomic backdrop for EM has improved, and explains why they think there is a strengthening case for EM outperformance.

The Fed Squares the Dots—Markets Yet to be Convinced

PGIM Fixed Income explains that although the markets’ conviction that the Fed will be cutting rates grew after the March FOMC meeting, markets may not be easily convinced that the economy is back on Easy Street. Instead, the markets are reacting as if we are in a late-cycle investment environment, which gets riskier for stocks as growth ebbs, but more positive for bonds as the rate cycle has presumably crested.

The LIBOR Transition

Planning for the market’s transition from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) has accelerated recently, but substantial uncertainty remains as to how and when the conversion of nearly $370 trillion of financial products will occur. PGIM Fixed Income discusses the progress to date; critical future milestones; and concerns regarding the sufficiency of SOFR as an adequate LIBOR replacement.

The Technology Frontier

We are living in an era of unprecedented technological change. PGIM believes the implications for investors will be profound, radically transforming investment opportunities across asset classes and geographies.

The U.S. Automotive Industry: Downshifting but Still Moving Forward

In addition to the mounting cyclical challenges confronting the U.S. automotive industry after years of strong growth, automakers and suppliers also face an uncertain future made up of rapid technological change and the potential full-scale realignment of the personal ownership business model. PGIM Fixed Income analyzes current auto cycle fundamentals and discusses the risks and opportunities in the nascent era of increasing electrification, autonomy, and shared mobility.

2019 Capital Market Assumptions

QMA expects real economic growth in the developed economies to continue to moderate over the next decade, as it has for the last 30 years. QMA’s Global Multi-Asset Solutions team It believes growth of the developed labor force is limited by domestic demographics, with no expectation for a significant offset from improved productivity growth. The team explains why it expects lower U.S. equity, stronger U.S. bond, and healthier commodity returns over the next 10 years.

A Time Bomb It's Not

The ongoing expansion of the BBB-rated segment of the corporate bond market often draws comparisons to a disaster waiting to happen. Some theorize that when the speculated turn in the credit cycle occurs, the consequent credit-rating downgrades will swamp the high yield market. Yet, this is an oversimplified generalization. Certain companies have several levers to pull in order to comfortably manage their debt through the entirety of the credit cycle. PGIM Fxied Income explores these options and provides current examples of BBB-rated credits that have the wherewithal to reduce their recently expanded leverage levels.

Secular Growth Juggernauts Shine as S&P 500 Earnings Growth Slows

The year-over-year S&P 500 EPS growth rate is more muted compared to the stellar growth rates seen in the past few quarters. Jennison's Growth team believes the current consensus estimate rate should still be sufficient to boost share prices in the wake of the recent sharp share price declines. The team shares their latest views on key secular growth themes they expect to drive markets in 2019 and beyond, their views on some of the key players in these industries, and how those companies fared in the fourth-quarter earnings cycle.

ECB - Surprisingly Dovish on Several Counts

The central bank surprised the market with a package that is designed to impress and stamp out skepticism that the ECB may be out of ammunition with policy rates already in much-criticized negative territory and having just stopped its bond purchases at year end. PGIM Fixed Income shares their views on the latest policy action and implications.

Seeking Spread Along Steep High Yield Curves

While many sectors have partially recovered since the worst of the December 2018 market volatility, a shift in the U.S. leveraged finance market continues to present attractive opportunities. PGIM Fixed Income explains how by selling short-dated issues that have experienced solid spread compression and slightly extending along particularly steep spread curves, investors can pick up significant spread in what is still a stable economic backdrop.

Fed Shift from "Put" to "Collar Bodes Well for Spread Product

PGIM Fixed Income discusses the result of the Fed's "market-collar", which may well be a prolonged economic expansion with perhaps a volatile, but extended, cycle for spread-product outperformance versus government securities.

China’s Bond Market Opening – Gentle Giant or Behemoth

The opening of China’s onshore bond market marks a historic juncture. PGIM Fixed Income highlights recent key developments, relevant technical specifics, and the intertwined macroeconomic and regulatory idiosyncrasies that investors need to be cognizant of in order to fully realize the potential of this new investment opportunity.

Fixed Income: The Active Advantage

Despite lower costs, passive investors are giving up opportunity for alpha in exchange for relatively small savings. This paper explores performance and important idiosyncrasies of the fixed income market that investors should consider when choosing between active and passive.

The Economics of Global Aging

The global economy is in the midst of an accelerating demographic transition, and the implications of this shift for macroeconomic performance and financial markets are sobering. PGIM Fixed Income looks how aging demographics tend to result in softer real GDP growth, higher public debt levels, and lower inflation.

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